Tracking and reconciling operating expenses isa crucial but challenging part of running a successful commercial real estatebusiness. However, it is especially important to pay attention to operatingexpense (OpEx) reconciliation when buying or selling a property to ensure thatthe transition goes smoothly.
In this article, we’ll review the basics ofoperating expense reconciliation before discussing strategies and bestpractices for handling this complex process during property sales.
What are Operating Expenses?
Operating expenses cover every cost associatedwith a commercial property other than rent. These costs may vary betweenindividual properties, but usually include things like taxes, maintenance,utilities, insurance, and administrative or personnel expenses. It’s crucial totrack each of these costs carefully throughout the year for your records.
How are Operating ExpensesDifferent from Common Area Maintenance Fees?
Common area maintenance (CAM) fees are a typeof operating expense. CAM fees refer specifically to the costs required to keepup shared areas of a property, such as lobbies, elevators, or parking lots.Commercial leases usually allow owners to pass on most CAM fees to tenants.
Each tenant is responsible for a portion ofCAM fees based on the number of square feet they rent on the property. Thisportion is also called their pro-rata share. However, it is important to notethat not all tenants will be responsible for the same expenses. Depending ontheir individual needs for the space, tenants can negotiate exemptions forareas or equipment they do not use. Examples might include elevators on theopposite side of the building or grease traps in drains of neighboringbusinesses.
What is Reconciliation?
Reconciliation is the process of comparingpredicted expenses to actual expenses, usually at the end of each year.Typically, landlords estimate their operating expenses at the beginning of theyear and pass some of them on to tenants in a monthly charge. At the end of theyear, landlords must review costs to see if they were higher or lower thanexpected. If higher, they must bill tenants for the difference. If lower,landlords must reimburse tenants for the extra.
Tips for Operating ExpenseReconciliation During Property Sales
Usually, reconciliation is an end-of-yearprocess. However, if you decide to sell a property, you will want to perform anadditional reconciliation to make sure everything is in order and to bettercommunicate with your tenants and your buyer. Here are a few strategies to keepin mind when reconciling for property sales.
ReconcileBefore the Sale Goes Through
The most important step is to reconcile beforeselling. This ensures that you have accurate, up-to-date information about theproperty’s expenses and charges to tenants to share with the buyer. Sharingthis information allows the buyer to review the information, spot any potentialissues, and prepare to take ownership of the property. It’s a courtesy thathelps the transaction go smoothly for everyone involved.
CommunicateClearly with All Parties
Be sure to share reconciliation informationwith your buyer, and remain available for any questions. Again, clearcommunication now helps prevent problems down the road and builds a positivebusiness reputation for you. You may also want to check in with tenants at thistime to ensure that everyone is on the same page about reconciliation and fees.
Double-CheckCalculations
It should go without saying, but recheck yourreconciliation process for accuracy. Preferably, consult an experiencedaccountant to help avoid errors.
Similarly, if you are looking to buy aproperty, it is important to closely review all financial materials provided bythe seller, including operating expense reconciliations. This helps you catchand resolve potential issues before taking control of the property, as well asto gain a better understanding of how the property runs.
Be Familiarwith Special Circumstances
Remember to review each tenant’s lease forexceptions or other unique terms. Forgetting to factor in special circumstancesresults in incorrect calculations and often overcharges tenants, which leads tolost trust. In addition, you can accidentally pass on these errors to yourbuyer, who will have to deal with upset tenants and may face unexpected coststo resolve the issues.
Take Advantage of CommercialProperty Management Software
Even the best strategy for handling operatingexpense reconciliation can be difficult to maintain, especially when you mustreconcile quickly in order to sell a property. However, there are tools thatcan help you streamline this process. Commercial property management softwarelike STRATAFOLIO syncs with your existing QuickBooks Desktop or Online accountautomatically, helping you easily track and organize your expenses throughoutthe year. When it’s time to reconcile, you can do so in just 1-click, allowingyou to focus your time and energy on the property sale. To make operatingexpense reconciliation simple, try commercial property management software.
About the Author:
Jeri Frank is the Co-founder and CEO ofSTRATAFOLIO, a leading software platform that integrates seamlessly withQuickBooks to simplify the complex world of commercial real estate management.
A recognized thought leader, Jeri contributesregularly to the Forbes Business Council and has shared her expertise throughIREM and CCIM podcasts and webinars. STRATAFOLIO has earned top industryrecognition, including being named a top platform by CREtech, selected for theNational Association of Realtors REACH program, and listed by Houlihan Lokey asa top property management system for several consecutive years. STRATAFOLIOconsistently earns 5-star reviews from platform users for its unique ability toreduce manual activities by 80%. You can find links to many resources andguides on their website.
